The Impact of the Jobs and Growth Tax Relief Reconciliation Act of 2003

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Abstract

This paper focuses on issues surrounding the Jobs and Growth Tax Revenue
Reconciliation Act of 2003. This act was proposed by President George W. Bush and
was designed to reduce taxes paid by individual taxpayers. The most significant aspect
of this tax cut is the dividend portion, which reduced the tax rate on dividends from 39.6% under the old law to 15% under the new law.
The new tax cut should have a strong impact on stock values. Because stock
values are based on the present value of future dividends that the stock will pay, stocks
that pay a dividend will be valued higher because the amount of the dividend that is taken
away by taxes is lower. The new law may also cause companies to increase their
dividend payouts because paying dividends becomes more attractive. An increase in the
amount of dividends paid could also improve the business practices of many companies.
The tax cut will also benefit the economy as a whole, although it could also cause
problems down the line with budget deficits.
In the empirical section of this paper we examined whether a stock's dividend
yield was related to its performance over an eight week time period. We found that
dividend yield actually had a negative impact on the performance of a stock. That is,
stocks with lower dividend yields performed better than those with high dividend yields.
This is not what we expected, but it is possible that we did not get the results we expected
because of the efficient market hypothesis and because of the recent high performance of
low dividend sectors such as Information Technology.